Sluggish outlook hits SKF India’s stock

The firm said it was cautiously optimistic about growth opportunities in the medium to long term, even as the near-term outlook is challenging
Mark to Market | Vatsala Kamat


Shares of SKF India Ltd, an automotive and industrial component firm, have fallen by around 3.7% after its March quarter results were announced last week. Apart from the tepid performance, the management note did not allay investor concerns on the outlook for the future either. The firm said it was cautiously optimistic about growth opportunities in the medium to long term, even as the near-term outlook is challenging.

Understandably so, given that around half its revenue comes from the industrial segment, which has been sluggish for the past few quarters on account of the slowdown in economic activity. Sales to the automotive original equipment segment, which accounts for about one-third of SKF India’s revenue, were also subdued in spite of better-than-expected auto sales during the quarter. This was because most auto firms cleared up inventory. Net sales fell 7.3% from a year ago and by 2.3% against the preceding quarter to Rs. 587.1 crore.

SKF India, however, managed costs effectively to improve profitability. Although, operating profit for the quarter at Rs. 88.3 crore was around 4% lower than the year-ago period, operating margin improved by nearly 60 basis points to 15%. One basis point is 0.01 percentage point.
This came as a result of lower raw material costs as a percentage of sales. Employee costs fell on account of write-back of provisions made in the earlier quarters. According to analysts, lower other expenditure was due to non-payment of service fee to the Swedish parent, which is likely to be bundled in the current quarter. This may hit margins in the current quarter.

That said, SKF India is backed by its Swedish parent whose commitment to Indian operations has translated into aggressive capacity expansion. The firm’s capital expenditure will increase from around Rs. 85 crore in 2011 to Rs. 100 crore this year. Of course, this will not satiate investors until sales momentum is visible.

SKF India posted a meagre 8.2% growth in net profit to Rs. 66 crore. This was partly driven by higher other income and interest income earned during the quarter.

“One can expect revenue and a resultant earnings momentum from the industrial segment only after a couple of quarters, as the impact of softer interest rates would lead to an improvement in economic activity only with a lag,” said Umesh Karne, analyst at Brics Securities Ltd. The stock trades at fair valuations of around 16 times 2012 estimated earnings.

(Source : http://www.livemint.com/2012/04/24223607/Sluggish-outlook-hits-SKF-Indi.html)